LONDON — All looks calm on the surface of the mortgage market.
Interest rates and unemployment are at record low levels, as are mortgage arrears – which have more than halved since the depths of the financial crisis.
The proportion of lenders’ mortgage books in arrears fell to 1.07% in the fourth quarter of 2016, from 1.10% in the quarter before.
It's the lowest level of arrears since public records began at the start of 2007.
But, according to Samuel Tombs, chief UK economist at Pantheon Macroeconomics, this is just instilling "complacency in markets" about households' financial stability.
An economic slowdown could be on the way, and if it hits it will have a bigger impact on borrowers than past recessions.
While mortgage repayments have been lowered by near-zero Bank of England interest rates, the overall amount of debt relative to income borrowers have had to take on to buy a home has skyrocketed along with house prices.
Here is Tombs (emphasis ours):
"Mortgage debt is the biggest single component of households’ total liabilities, and equalled 104% of disposable incomes in Q3 2016. This was well below the 2008 peak of 118%, as our next chart shows, while mortgage payments have fallen to a record-low 4.5% of total households’ income."
"But these numbers are misleadingly comforting, because the stock of debt is concentrated among fewer households than in the past. Just 30% of households now have a mortgage, down from 40% a decade ago. Loan-to-income ratios for first-time buyers have never been higher."
And here's the chart:
"Accordingly, we think record low interest rates have instilled complacency in markets about households’ ability to maintain mortgage payments if the economy weakens significantly," said Tombs.
"Mortgage arrears likely would rise sharply if the slowdown in the labour market becomes more pernicious and joblessness begins to rise."
While the surface of the mortgage market is calm, dark currents just beneath could pull the economy down if the water gets choppy.
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